Tuesday, May 3, 2011
The "new high" list was covered with oil stocks last week.
That's no surprise. Oil is trading above $110 per barrel. It costs more than $100 to fill up my gas tank. Oil companies are swimming in profits and oil company shareholders are reaping huge gains. Take a look at this one-year chart of the AMEX Oil Index (XOI)...
The XOI is up 45% in the past eight months. Indeed, it has been a great time to own oil stocks.
Now, however, it's a bad time to buy them.
Right now, the oil sector is trading where it was back in June 2008. Back then, there was unrest in the Middle East. China and India were increasing consumption. We were entering the summer driving season in the United States. Every analyst within spitting distance of CNBC was bullish about oil.
Six months later, oil was trading for $40 per barrel... and the AMEX Oil Index had been cut in half.
Oil and oil stocks are cyclical. There's a good time to buy into the sector and a bad time to buy. June 2008 was a bad time to buy, and I warned you about it here. Oil investments were too popular. The industry was riding a perfect storm for profits. Everybody was projecting higher and higher oil prices.
Then oil collapsed.
It is eerily similar to today. Oil bulls point to turmoil in the Middle East, increasing demand from China, and a pickup in the U.S. economy as justification for ever-increasing oil prices. It doesn't matter that the price of oil is up 60% since September or that oil stocks are up 45%. "Get on board," they shout, "or you'll miss out completely."
Don't do it.
As my colleague and natural resource expert Rick Rule is fond of saying, "When it comes to investing in natural resources, you're either a contrarian or you're a victim."
Be a contrarian.
Best regards and good trading,
Back in June 2008, oil stocks looked like a "can't miss" investment. But Jeff warned "now is a bad time to buy oil." Less than four months later, the AMEX Oil Index was down nearly 50%. Read his original advice here: How to Make a Lot of Money Trading Oil This Summer.
Resource expert Matt Badiali shared similar advice with DailyWealth readers yesterday. "After such a big run, the tendency for many investors is to believe it will continue running higher and higher without interruption," he wrote. "But this kind of thinking can kill your returns." Get the full story here: The Best Way to Make Money in Commodity Stocks This Year.